PM That I GotGot a PM today with a simple question.
Like many simple questions, the answer is not simple.
Here is the PM...
"Thank you for your posts, I very much enjoy reading them and your perspective is valuable to me.
One question though.
Where do you see the market bottoming out at?"
While I posted the other day that I wait until I see that the market has turned before I go back in and if I miss the first 5-10% I am don't care. That said, for planning purposes, I do try to come with some sort of idea where the bottom might be so I am prepared to change gears.
So this question posed in the PM is a great one and frankly I was still working on getting some sort of planning assumption even before I got the PM. So while I don't have an answer, I thought I would share with others here the things I am looking at or thinking about.
Part of this is to look at history and see if there are comparable periods of time to draw parallels. When I do this, the end result is that we are in a combination of several time periods and so this one is somewhat unique.
Soooo...here goes....may take more than one post....don't know yet as this will be more like a steam of consciousness than a pure analytical analysis.
1.....as I posted earlier I don't see a parallel to the Great Recession of 2008. There are just too many differences which I pointed out in an earlier post.
2.....there are a lot of similarities to what happened in the early 1980s in that the Fed was way behind the curve and has to raise interest rates into the high teens. But the difference is that I don't believe that the wage/inflation spiral is/will be as bad today because we don't have the same degree of COLA clauses in labour contracts as we had back then.
3...the other difference from the early 80s is that interest rates skyrocketed because Government borrowing crowded out private investment and so the demand for credit spiked the interest rates. I don't think we are now in the same situation with central banks willing to lend $ to Governments more than back then
4....we do have parallels to the early/mid 70s in that inflation was fuelled by a surge in commodity prices
Soooo...when you look at it from this perspective you might conclude that things today aren't so bad and so the market may well not tank like it did before.
But what if the current situation is an amalgam of the characteriztics of these time periods?
1....we are like 1973 in that we have a commodity price boom at least as far as oil is concerned
2.....like the early 80s, Government fiscal positions are such that they have limited ability from a budgetary point of view to help
3....like the 1980s we have had a decade of financial engineering by Central Banks leading to a situation where they are more or less powerless to address the underlying problems and their only tool is a massive contraction of the money supply thorugh increases in the interest rates
Now.....
If you look at a long term chart of the DOW from say 1900 to today you see a technical channel that it traded in. The extrapolation of this trend line would suggest that for the DOW to move back into the channels we would see a value between 15000 and 20000.
So while I am still digesting all this in my mind, my spidey sense is that something around a 50-60 per cent retracement is not unreaslistic. I emphasize that that is not a forecast right now as I have to do more thinking about all this.